Dawn Huston, 31, started working at Dansko 11 years ago, sorting shoes for delivery. Now a warehouse processor, she said the idea of owning a piece of the company made her nervous at first—though she wasn’t worried about her retirement savings, since the company offers a separate 401(k) plan. Over the past year, she’s begun referring to Dansko as “our company.”
Usually, the family business is either sold or passed down to a family member. But some business owners have decided that their employees should take over ownership after their gone.
This unusual plan is known as an Employee Stock-Ownership Plan, “ESOP” for short.
ESOP’s have been growing in popularity, particularly during a down market, when finding an outside buyer can be especially difficult. As you might expect, however, an ESOP is a difficult strategy to implement. Essentially, an ESOP mixes a family exit strategy for the owner with a kind of company retirement plan. The ESOP document itself contains multiple layers of protection regarding the operations and management of the business.
Of course, many are critical of the idea, including the folks over at MarketWatch who recently published a critical article titled: “When founder cash out, do workers lose?”
As the article points out, an ESOP may expose the employees to the kind of risks that come along with business ownership. While employee-ownership in the company can provide motivation and spur innovation, it can also degrade into a tricky game of “all-your-eggs-in-one-basket” for the employees-turned-owners.
Reference: MarketWatch (May 17, 2013) “When founder cash out, do workers lose?”